]]>http://sunbeltalphaville.com.br/boas-empresas-nao-sao-vendidas-elas-sao-compradas/feed/0The Difference Between Working Capital and Cashhttp://sunbeltalphaville.com.br/difference-working-capital-cash/
http://sunbeltalphaville.com.br/difference-working-capital-cash/#respondThu, 03 Dec 2015 19:34:20 +0000https://sunbelt-th3darknezz.c9users.io/?p=562While busy operating a business, it’s easy to simplify the complex issues that loom in the background. One example of an area where many business owners take shortcuts is in truly understanding their companies’ financials. Taxes cost a business 35%, most accounts receivables are net 30, and “working capital” is cash required to run a business. […]

]]>While busy operating a business, it’s easy to simplify the complex issues that loom in the background. One example of an area where many business owners take shortcuts is in truly understanding their companies’ financials. Taxes cost a business 35%, most accounts receivables are net 30, and “working capital” is cash required to run a business. During the normal course of a business, leaving any level of detail beyond this to a good accountant isn’t a big deal. However, when it comes time to sell the business, appreciating the nuances of the most important financial terms can mean the difference between a good deal and a bad deal.

One common misunderstanding is how working capital and cash relate. It surprises many entrepreneurs that they have to leave the working capital “in” the company when they sell. If working capital (in the simplest terms) is assets less liabilities, most believe their only obligation is to leave a balance sheet of $0 and walk away with all other cash. However, the reality is different and more nuanced.

Calculating Working Capital

Working capital is the measure of a company’s liquidity and is factored into valuations. In essence, acquirers buy working capital in a perfect dollar-for-dollar exchange when they buy a company. What an entrepreneur can take away – usually – is excess cash, common stock or retained earnings. But only if those are not figured into the working capital. In a perfect case, they will not have been, though not everything is clear if you only use the basic calculation. The classic formula for working capital is simple:

Working Captial = Current Assets – Current Liabilities

“Current” usually means maturing within the next calendar year. But this formula is too simplistic for purposes of a sale and open to loose interpretation. Do current assets include cash and common stocks? Do liabilities include taxes? While the entrepreneurial instinct to subtract assets and liabilities is close, it’s incomplete. A more precise (but still simplistic) formula is to look adjusted working capital (AWC):

Both formulas use balance sheet values, but diverge in one important respect. The classic formula may or may not include cash as an asset where the AWC formula does not include cash at all. The nuances aren’t always critical when running a successful business, but can be extremely important in negotiating a sale.

Working Capital During a Sale

You must understand your company’s working capital needs before you sell. Work with your financial advisors to determine exactly what the business needs to operate and what capital is excess. By clearly delineating the difference between working and excess capital, you’ll better understand your company’s valuation. You’ll also be able to spell out everything in the letter of intent and in the contract.

But no matter how tight the contract, you should expect that adjustments will happen after closing. Working capital is a moving target that changes every time a company places an order, receives payment, and so forth. This is why sellers and buyers agree on a working capital target or working capital peg. It is an educated guess of what AWC will be at closing, based on historic balance sheets. The historic period is typically a year, but may be just a few months in the case of a meteoric startup (and if the buyer agrees). The target will not be precise, and one party will owe the other a ‘true-up’. In the case of a deficit, the seller owes the buyer, and in the case of a surplus, the buyer owes the seller.

As part of negotiating a sale, you may agree to leave some of that excess cash in the coffers for operating expenses. Buyers may not wish to pay cash out of pocket to keep the business running. It’s all negotiable. Operating cash is much like buying a home where buyers can make offers based on the seller paying closing costs or you can choose to pay closing costs to sweeten a deal. Hold backs are often part of the negotiation. Excess capital is left in the business for 90 or 120 days to cover any adjustments with the leftover capital returned.

Post-Deal Adjustments

While the negotiations may seem amicable enough, not every deal is easy and clean. In the worst of cases, the acquirer disputes the working capital – claiming it was nowhere near the target. Barring misbehavior on either side, sometimes what goes wrong is simple and hard to avoid. The problem occurs because the seller and buyer used different calculations for the working capital target. If the difference is significant and the two parties can’t come to an agreement, a lengthy and torturous process of litigation and forensic accounting can occur.

There are a dozens of specific causes of those mismatched figures, but here are a few that are typical:

The seller may not have figured taxes into liabilities: taxes are not invoiced and may be figured elsewhere in the operating budget.

The parties may disagree on a cut-off date for that post-close true-up. A shorter period calls for more speculation by the acquirer, and the acquirer may naturally figure in their own favor.

The parties disagree on materiality – that is, information that was material to the buying decision. This is a problem of due diligence. The seller may have a stack of unrecorded invoices, have overestimated the useful life of inventory, have failed to disclose pending litigation, etc.

A well-executed contract (backed up by well-executed diligence) is always the answer. The contract should allow for as little interpretation as possible. Accountants on both sides should spell out the accounting policies to the letter and add them to the contract. Getting everyone on the same page before the deal is closed will solve a lot of problems.

Knowing the conditions of your business before you ever start makes the process much easier. One straightforward way to be ready for any potential transaction is to clearly understand how your business operates, what to expect for the capital currently in your business, and what capital is the excess you can take with you

]]>http://sunbeltalphaville.com.br/difference-working-capital-cash/feed/0When to Buy: 5 Questions to Ask Before Buying a Businesshttp://sunbeltalphaville.com.br/when-to-buy-5-questions-to-ask-before-buying-a-business/
http://sunbeltalphaville.com.br/when-to-buy-5-questions-to-ask-before-buying-a-business/#respondThu, 03 Dec 2015 18:24:36 +0000https://sunbelt-th3darknezz.c9users.io/?p=536Knowing when to buy a business is just as important as knowing when to sell. It is generally accepted that buying an existing business is less risky than starting one from scratch, though there are exceptions. There is always an element of risk when it comes to starting, selling, or buying a business, and it […]

]]>Knowing when to buy a business is just as important as knowing when to sell. It is generally accepted that buying an existing business is less risky than starting one from scratch, though there are exceptions. There is always an element of risk when it comes to starting, selling, or buying a business, and it is important to ask the right questions before diving in. Of course, there are a number of items to consider before buying a business. The following five questions are meant to get the ball rolling and to help you carefully consider your next move.

How much do I know about this industry? It takes a lot of energy, time, and tenacity to run a business, even when you are an expert in the field! Too often people with a little bit of business experience will jump into an industry they know little about simply based on some baseline skills and networking connections. It doesn’t work that way, unfortunately. Now, this doesn’t mean that you shouldn’t venture into something new. You may need to invest in learning about an industry and immersing yourself in a community before making the plunge. Knowing when to buy is acknowledging your limits but being willing to learn.

What size of business am I looking for? This question is meant to have you thinking long-term before you buy. What is a good size business for you now, in five years, in 10 years, and beyond? Do you want to buy a business that has room to grow or one that has reached capacity? There is no one-size-fits-all business and knowing when to buy means thinking ahead and looking at all the angles.

What is the best location for me and the business? This is an important question to consider as you decide when to buy. Do you have a family in a certain area? Are you looking to move or travel more often? Owning a business is very hands on, especially at the beginning. While you can get away with remote management, especially in certain industries, it is not optimal. The location within a region, city or a neighborhood are all incredibly important factors as well. Take location very seriously as you consider buying a business.

Is this the right time to buy? Figuring out when to buy a business is ultimately centered around it being the right time or not. The confidence that comes from being prepared, knowledgeable, and financially stable before buying a business is priceless. Additionally, you must look at the market and the industry’s trajectory as you decide when to buy.

What is my exit strategy? Now, why would you consider an exit strategy before you even buy the business? Because planning is imperative for success. Knowing how you want to eventually leave a business will help you investigate a potential business more thoroughly and help you formulate a better all around plan.

Buying a business is exhilarating. The start of something new and the potential for growth and success makes it a venture worth investigating. But, knowing when to buy and asking the right questions must be a priority. If you are looking for assistance in buying, contact Sunbelt! As the world’s largest business brokerage firm, we have the experience and resources to find you the best opportunity to fit your needs.

]]>http://sunbeltalphaville.com.br/when-to-buy-5-questions-to-ask-before-buying-a-business/feed/05 Ways Businesses Destroy the Chance of a Good Dealhttp://sunbeltalphaville.com.br/5-ways-businesses-destroy-the-chance-of-a-good-deal/
http://sunbeltalphaville.com.br/5-ways-businesses-destroy-the-chance-of-a-good-deal/#respondWed, 18 Nov 2015 18:38:47 +0000http://localhost/sunbelt/?p=308Every selling business owner dreams of the same exit outcome: sell high, retire well. As such, in the years leading up to the sale, most owner-operators become marketing experts – articulating the strengths of their company, showing would-be buyers the potential for continued growth (and ultimately buyer return). What most owners fail to recognize, […]

]]>Every selling business owner dreams of the same exit outcome: sell high, retire well. As such, in the years leading up to the sale, most owner-operators become marketing experts – articulating the strengths of their company, showing would-be buyers the potential for continued growth (and ultimately buyer return).

What most owners fail to recognize, however, is that rather than focus solely on the good, they should look closely at the bad. A vital exercise in preparing a company for sale is to stamp out the ways in which the business may be destroying value on its way there. There are five common warning signs that this is happening and that a business is at risk for selling at an inopportune time, for a lower price, or perhaps not at all.

Your business is too dependent on new sales

As a means of survival, many businesses operate with a transactional mindset. You seal the deal and quickly move on to the next prospective sale, while putting little effort into client retention. However, business growth expert, Dorie Clark, recently noted in a Forbes article that if your business is driven by new sales versus long-term contracts, the value of your company will be driven down due to long-term risk potential. Therefore, contractually recurring revenues from contracts for annual maintenance, annual licensing fees, retainer fees, technology licenses, and others are much more powerful value-drivers for buyers.

Your business is too dependent on an indistinguishable commodity

From a buyer’s perspective, a business with a lack of unique value proposition (UVP) and no real differentiation in the market increases risk and decreases value. A commodity product or service that is difficult to defend with lower margins and profit potential will be consistently challenged by the market.

A prime example of the impact of UVP on business valuation can be seen in the recent acquisition of microchip manufacturer, Altera by industry behemonth, Intel. In the wake of the deal announcement, many pointed to Altera’s success in creating high barriers of entry leading it to achieve some of the highest margins in its industry.

Inked at $16.7 billion, the Altera acquisition is now the largest in Intel’s history. Since the announcement, Altera’s market cap has reached $15.52 billion and Intel’s stock price has increased by 7.2%.

Your business is reliant on you

While you may see it as a positive that you’ve been integral to the business during its growth years, a sale process is the time to position the business to be able to run without you. Owner-dependent companies are often considered knowledge-intensive firms, where a significant amount of unwritten knowledge lies with the owners. With no system in place to transfer this intellectual capital to the buyer, the price, marketability and deal structure of a sale will be negatively impacted with the increased risk perception of the buyer.

In an interview with Forbes, Axial menber Brent Beshore commented that “everyone loves to feel needed, but for an owner trying to sell his business, this is a major challenge.”

“The more vital the owner is to the business, the more challenging it will be to replace him,” he added. “Replacement costs for owners involved in day-to-day operations typically fall between $ 125,000 and $ 400,000 and are deducted from the estimated EBITDA”.

Your business is in a market with no potential

According to a recent report in Gigaom, another issue is that your business is in a narrow market segment, which increases the buyer’s risk and negatively impacts your valuation. For instance, the best case scenario for a limited market business is that a buyer feels modifications can increase your valuation on a post acquisition performance basis. However, even with 100% market penetration, your earning potential is still capped.

In an interview with Gigaom, Martin Wolf, founder and president of his namesake middle market IT M&A firm, noted that a narrow, limited market segment is at risk of acquisition windows for larger companies based on economic conditions. Wolf used a hypothetical example with Oracle to demonstrate his point about how a larger corporation can reduce the value of a market segment.

For instance, if Oracle acquires your competitor, it makes a play into your segment by leveraging its product line or services as complementary sales assets. However, by acquiring these complementary assets, Oracle also buys invaluable partnerships and customer relationships, thereby reducing the value of all companies in that segment.

Your business is too dependent on a few customers

If your business lacks customer diversity or high client concentration, it’s negatively valued in the acquisition market as the risk factors increase, Beshore stated. Should a customer discontinue his or her affiliation with your company, revenues will be significantly affected.

“The more power any outside force has over the performance of the business, the riskier it is,” he argued. “For instance, if a client represents more than 20 percent of revenue, multiples typically start to drop.”

Ultimately, in these situations, if you can negotiate the sale of your business, you may receive a down payment for the value of your business assets. However, you may also be compelled to take the remaining value in a seller note, or an earn-out based on future performance